HALF YEAR FINANCIAL REPORT 2019 - UPM · China and the US, growth in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have

HALF YEAR FINANCIAL REPORT 2019

UPM HALF YEAR FINANCIAL REPORT 20192

This half year financial report is unaudited

UPM Half Year Financial Report 2019: Margin management delivered continued earnings growth

Q2 2019 highlights• Sales grew by 1% to EUR 2,605 million (2,589 million in

Q2 2018)• Comparable EBIT increased by 3% to EUR 345 million

(334 million)• Cost environment started to moderate, fixed costs decreased

mainly due to lower maintenance activity• Operating cash flow increased to EUR 436 million (328 million)• Net debt decreased to EUR 366 million (401 million)

Q2/2019 Q2/2018 Q1/2019 Q1–Q2/2019 Q1–Q2/2018 Q1–Q4/2018

Sales, EURm 2,605 2,589 2,693 5,298 5,102 10,483Comparable EBITDA, EURm 1) 466 442 488 954 898 1,868 % of sales 1) 17.9 17.1 18.1 18.0 17.6 17.8Operating profit, EURm 319 349 373 692 734 1,895Comparable EBIT, EURm 345 334 374 719 689 1,513 % of sales 13.2 12.9 13.9 13.6 13.5 14.4Profit before tax, EURm 300 337 364 664 708 1,839Comparable profit before tax, EURm 325 322 366 691 663 1,457Profit for the period, EURm 245 269 304 549 577 1,496Comparable profit for the period, EURm 271 258 305 576 545 1,194Earnings per share (EPS), EUR 0.46 0.50 0.57 1.03 1.08 2.80Comparable EPS, EUR 0.51 0.48 0.57 1.08 1.02 2.24Return on equity (ROE), % 10.0 12.1 12.3 11.4 13.3 16.2Comparable ROE, % 11.1 11.6 12.3 11.9 12.5 12.9Return on capital employed (ROCE), % 11.2 14.2 13.6 12.8 14.9 18.4Comparable ROCE, % 12.2 13.6 13.7 13.3 14.0 14.6Operating cash flow, EURm 1) 436 328 320 756 542 1,330Operating cash flow per share, EUR 1) 0.82 0.61 0.60 1.42 1.02 2.49Equity per share at the end of period, EUR 17.91 16.37 18.84 17.91 16.37 18.36Capital employed at the end of period, EURm 10,820 9,691 11,318 10,820 9,691 10,575Net debt at the end of period, EURm 366 401 –5 366 401 –311Net debt to EBITDA (last 12 months) 1) 0.19 0.22 –0.00 0.19 0.22 –0.17Personnel at the end of period 19,760 19,836 19,008 19,760 19,836 18,978

Key figures

UPM presents certain measures of performance, financial position and cash flows, which are alternative performance measures in accordance with the guidance issued by the European Securities and Markets Authority (ESMA). The definitions of alternative performance measures are presented in » UPM Annual Report 2018.

1) The 2018 comparative figures have been restated due to accounting policy change of forest renewal costs. Refer to » Basis of preparation and accounting policies.

H1 2019 highlights• Sales grew by 4% to EUR 5,298 million (5,102 million in

H1 2018)• Comparable EBIT increased by 4% to EUR 719 million

(689 million)• Sales prices were higher, outweighing the impact of increased

variable costs• Operating cash flow increased to EUR 756 million (542 million).• UPM decided to close Paper Machine 10 at UPM Plattling,

Germany

UPM HALF YEAR FINANCIAL REPORT 2019 3


“The second quarter of the year marked the 25th consecutive quarter of increased earnings for UPM. This is a remarkable achievement, all the more so as economic growth remains modest, particularly in Europe. UPM has the tools to drive results in changing market conditions. Our operating model has enabled us to maintain good margins, which has had a favourable impact on our earnings. During the quarter, the cost environment started to moderate, too.

Our sales grew by 1% and comparable EBIT increased by 3% to EUR 345 million. Operating cash flow was strong, at EUR 436 million. Our balance sheet is truly industry leading. In the second quarter, we paid a dividend of EUR 693 million, and net debt at the end of the quarter was EUR 366 million.

UPM Biorefining reported a stronger second quarter than last year despite lower pulp prices. There was a consistent customer demand for pulp and our deliveries increased compared with the same quarter last year. Biofuels saw strong customer demand and performed very well. Maintenance activity was significantly lower than last year.

UPM Communication Papers reported a solid result. Prices remained at a good level, but the second quarter result was held back by the impact of reducing inventories. The development of paper demand in Europe has been somewhat weaker than last year. To ensure competitiveness, UPM Communication Papers is maintaining stringent cost control and asset optimisation. The closing of PM10 at UPM Plattling, Germany, was finalised in July, and the conversion of PM2 at UPM Nordland, Germany, continues.

UPM Raflatac reported stable earnings. Sales growth continued, although the slow economic environment, particularly in Europe, is impacting the demand for labels. Raflatac is continuing the fixed-cost reduction programme it started earlier in the year.

Outlook for 2019The global economic growth is estimated to continue in 2019, albeit at a slower pace than in 2018. There are, however, significant uncertainties related to this, including trade negotiations between China and the US, growth in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have an impact on the global economic growth and on UPM’s product and raw material markets during 2019.

UPM reached record earnings in 2018. UPM’s business performance is expected to continue at a good level in 2019.

In 2019, demand growth is expected to continue for most UPM businesses, albeit at a modest pace. Demand decline is expected to continue for UPM Communication Papers.

Jussi Pesonen, President and CEO, comments on Q2 2019 results:

UPM Specialty Papers was able to recover earnings due to lower pulp costs, solid customer demand and slightly improved prices in the Asian fine paper markets. To stay on this track, Specialty Papers is continuing its cost management and product development initiatives. In addition, the ongoing investments at UPM Nordland and UPM Changshu are progressing well and will support our growth in a highly competitive way as of next year.

UPM Energy had an excellent quarter with a perfect combination of higher hydropower and nuclear power generation volumes, higher electricity sales prices and lower costs.

UPM Plywood maintained its profitability. Production at the UPM Chudovo, Russia, plywood mill expansion will commence during the third quarter, further improving the competitiveness of the business.

UPM is in great shape, competitive and financially strong. Our strategic spearheads for growth and transformative projects provide us with significant long-term opportunities for value creation and earnings growth.

Preparations for the new world-class pulp mill in Uruguay are progressing towards a potential investment decision. Initial works on the central railway have been started and financing of the railway construction consortium is proceeding but is yet to be finalised. In UPM Biochemicals and in UPM Biofuels our work on preparing growth initiatives continues.

UPM is ready to seize the opportunities offered by bioeconomy. We firmly believe in growing sustainable businesses that offer solutions to global challenges. Our innovations create value and business opportunities for an era in which the world is no longer dependent on fossils.”

In H2 2019, pulp prices globally are expected to be lower than in H1 2019. Paper prices in Europe and North America are expected to be moderately lower. Also input costs are expected to decrease in H2 2019 compared with H1 2019. UPM will continue measures to reduce both variable and fixed costs.

Fair value increases of forest assets are not expected to contribute materially to comparable EBIT in 2019.



Adoption of IFRS 16 LeasesUPM has adopted IFRS 16 Leases standard on 1 of January 2019 without restating prior years. The change in lease accounting has resulted in a reduction in operating costs (and therefore an increase in EBITDA), higher depreciation expenses and positive impact on operating profit. In addition, interest expenses have increased slightly. Cash generation was not impacted by the adoption of the standard, however operating cash flow is positively impacted by it, given that a large part of the payments in relation to leases is now reported as financing cash flow (lease liability repayments). The group has estimated that as a consequence of the adoption of IFRS 16, the operating costs in 2019 would be approximately EUR 80 million lower (driving the increase in EBITDA by the same amount), depreciation expenses would be approximately EUR 60 million higher and interest expenses would be approximately EUR 10 million higher. The increase in leased assets on 1 of January 2019 amounted to EUR 489 million and the increase in financial debt amounted to EUR 488 million. Leased assets are not included in the measure of Capital expenditure.

ResultsQ2 2019 compared with Q2 2018 Q2 2019 sales were EUR 2,605 million, 1% higher than the EUR 2,589 million for Q2 2018. Sales grew in UPM Biorefining, UPM Raflatac and UPM Energy, and decreased in UPM Communication Papers, UPM Specialty Papers and UPM Plywood.

Comparable EBIT increased by 3% to EUR 345 million, 13.2% of sales (334 million, 12.9%).

Fixed costs decreased by EUR 33 million, mainly due to less maintenance activity being conducted than in the comparison period. Without the adoption of the IFRS 16 Leases standard, fixed costs would have been EUR 14 million higher than now reported. Delivery volumes decreased slightly from last year.

Development in sales prices and variable costs differed between businesses. At the group level, changes in sales prices contributed positively to comparable EBIT and this positive impact was larger than the negative impact of increased variable costs and changes in currency exchange rates.

Depreciation, excluding items affecting comparability, totalled EUR 118 million (106 million), including depreciation of leased assets totalling EUR 18 million (2 million). The change in the fair value of forest assets net of wood harvested was EUR –3 million (–3 million).

Operating profit totalled EUR 319 million (349 million). Items affecting comparability in operating profit totalled EUR –26 million in the period (15 million). This included EUR 29 million of restructuring charges in UPM Communication Papers.

Net interest and other finance costs were EUR 19 million (14 million). The exchange rate and fair value gains and losses were EUR –1 million (2 million). Income taxes totalled EUR 55 million (68 million).

Profit for Q2 2019 was EUR 245 million (269 million), and comparable profit was EUR 271 million (258 million).

Q2 2019 compared with Q1 2019Comparable EBIT decreased by 8% to EUR 345 million, 13.2% of sales (374 million, 13.9%).

Fixed costs increased by EUR 21 million due to seasonal factors and the scheduled maintenance shutdown at the UPM Kymi pulp mill. Delivery volumes decreased, partly due to seasonal factors.

Sales prices decreased, mainly for pulp. However, variable costs decreased as well, which had a larger positive impact on comparable EBIT than the adverse changes in sales prices.

Depreciation, excluding items affecting comparability, totalled EUR 118 million (120 million). The change in the fair value of forest assets net of wood harvested was EUR –3 million (5 million).

Operating profit totalled EUR 319 million (373 million).

January–June 2019 compared with January–June 2018H1 2019 sales were EUR 5,298 million, 4% higher than the EUR 5,102 million for H1 2018. Sales grew in UPM Biorefining, UPM Raflatac, UPM Communication Papers, UPM Energy and UPM Specialty Papers, and decreased slightly in UPM Plywood.

Comparable EBIT increased by 4% to EUR 719 million, 13.6% of sales (689 million, 13.5%).

Development in sales prices and variable costs differed between businesses. At the group level, changes in sales prices had a significant positive impact on comparable EBIT and this positive impact was larger than the negative impact of increased variable costs and changes in currency exchange rates.

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Fixed costs decreased by EUR 25 million, partly due to less maintenance activity being conducted than in the comparison period. Without the adoption of the IFRS 16 Leases standard, fixed costs would have been EUR 27 million higher than now reported. Delivery volumes were at the same level as last year.

Depreciation, excluding items affecting comparability, totalled EUR 238 million (212 million) including depreciation of leased assets totalling EUR 35 million (4 million). The change in the fair value of forest assets net of wood harvested was EUR 2 million (0 million).

Operating profit totalled EUR 692 million (734 million). Items affecting comparability in operating profit totalled EUR –27 million in the period (44 million). This included EUR 29 million of restructuring charges in UPM Communication Papers and EUR 5 million in UPM Raflatac.

Net interest and other finance costs were EUR 28 million (28 million). The exchange rate and fair value gains and losses were EUR –1 million (2 million). Income taxes totalled EUR 115 million (130 million).

Profit for H1 2019 was EUR 549 million (577 million), and comparable profit was EUR 576 million (545 million).

Financing and cash flowIn H1 2019 cash flow from operating activities before capital expenditure and financing totalled EUR 756 million (542 million). Working capital increased by EUR 64 million during the period (162 million).

A dividend of EUR 1.30 per share (totalling EUR 693 million) was paid on 17 April 2019 in respect of the 2018 financial year.

Net debt decreased to EUR 366 million at the end of Q2 2019 (401 million). The gearing ratio as of 30 June 2019 was 4% (5%). The net debt to EBITDA ratio, based on the latest 12 months’ EBITDA, was 0.19 at the end of the period (0.22).

On 30 June 2019 UPM’s cash funds and unused committed credit facilities totalled EUR 0.7 billion.

Capital expenditureIn H1 2019 capital expenditure totalled EUR 133 million, 2.5% of sales (119 million, 2.3% of sales). Capital expenditure does not include additions to leased assets.

Total capital expenditure in 2019, excluding investments in shares, is estimated to be approximately EUR 350 million, excluding any impact of UPM’s potential transformative prospects.

In April 2017 UPM announced plans to strengthen its position in the label market and invest approximately EUR 6 million in capacity for special labels in Tampere, Finland. A new special label product line has been built, focusing on small series production runs. In addition, internal logistics have been strengthened. The new product line was completed in January 2019.

In October 2017 UPM announced plans to expand its Chudovo plywood mill in Russia. The project will raise the mill’s production capacity by 45,000 cubic metres to 155,000 cubic metres, while also broadening the mill’s product portfolio. In addition to the growth in production capacity, a new bio-heat boiler will be built at the mill site. The total investment will be approximately EUR 50 million and will be completed by the end of Q3 2019.

In April 2018 UPM announced that it would rebuild paper machine 2 at its Nordland mill in Dörpen, Germany, and convert it from fine paper to glassine paper production. The machine will be equipped with new finishing equipment and will start producing glassine paper as of Q4 2019. The planned capacity after the rebuild will be 110,000 tonnes per year. The total investment in Nordland is EUR 116 million.

In April 2018 UPM announced plans to increase the release liner base paper capacity at the UPM Changshu mill in China. Installing a

second supercalender on paper machine 3 will create an additional capacity of more than 40,000 tonnes of glassine paper per year, as of Q1 2020. The total investment in Changshu is EUR 34 million.

PersonnelIn H1 2019 UPM had an average of 19,262 employees (19,297). At the beginning of the year, the number of employees was 18,978, while at the end of Q2 2019 it was 19,760.

Uruguay platform developmentUPM is studying the potential of building a new world-class pulp mill in Uruguay. The possible pulp mill would have an annual capacity of approximately 2 million tonnes of eucalyptus market pulp. The preliminary estimate for a pulp mill investment on site is approximately EUR 2 billion. The site of the potential mill would be close to the city of Paso de los Toros, located in the department of Durazno in central Uruguay. Two preparation phases need to be successfully completed before UPM will be in a position to make an investment decision.

Phase 1The first preparation phase started in July 2016, when UPM commenced discussions with the government of Uruguay regarding the prerequisites for long-term industrial development, as well as initiatives for infrastructure development in Uruguay. The investment agreement was signed on 7 November 2017, completing the first phase.

Phase 2The second phase is ongoing. The Montevideo port concession has been awarded to UPM. The mill engineering, design and tendering processes are all proceeding. The free-trade zone for the mill has been granted. Environmental permitting processes for the port and mill have been completed. Initial works on the central railway have been started.

Several important conditions agreed upon in the investment agreement had not been satisfied by the end of the reporting period. Achieving progress in the implementation of the infrastructure initiatives, most importantly the Central Railway PPP project, the labour protocols and conflict mitigation regulation, as well as certain material outstanding items as specified in the investment agreement, are all necessary before the second preparation phase can be concluded.

If the second preparation phase is concluded successfully, UPM will initiate the company’s regular process of analysing and preparing an investment decision about the potential pulp mill. This second phase is expected to last 1.5 to 2 years, starting from the signing of the investment agreement in November 2017.

The investment agreement in shortThe investment agreement outlines the local prerequisites for a potential pulp mill investment. It details the roles, commitments and timeline for both parties, as well as the relevant items to be agreed prior to the final investment decision.

A long-term industrial operation requires a stable and predictable operational environment. This will be supported by several measures in the areas of regional development, environment, forestry and land planning, as well as labour and energy conditions.

The government will develop the rail and road network by tendering the construction and long-term maintenance of the network. The government will also promote concession for a terminal specialising in pulp in the Montevideo port with rail access, ensuring a reliable and competitive outlet to export markets.

Once the permitting requirements are fulfilled, the government will grant the mill the status of a free-trade zone to ensure competitiveness in international markets.

UPM will carry out an engineering study and permitting process for a new world-class pulp mill with an annual capacity of about 2 million



tonnes of eucalyptus market pulp. The preliminary estimate for a pulp mill investment on site is approximately EUR 2 billion.

In addition, a successful project requires off-site investments in plantation land and forestry, road network and nursery capacity, harvesting and transport equipment, rolling stock for the rail, port and export facilities and human development.

Biochemicals business developmentUPM formed UPM Biochemicals in 2013 by combining its biochemical-related business initiatives. UPM Biochemicals offers and develops innovative, sustainable and competitive wood-based biochemicals. The product segments are biochemicals, lignin products and biomedical products. Development is at the pre-commercial phase, with UPM actively developing and testing industrial applications to create industrial-scale mill concepts.

In October 2017 UPM announced that it was evaluating the potential of building a biorefinery in Germany. Basic engineering of the potential biorefinery has been completed. Currently the company is assessing two alternative industrial parks in Germany – in Frankfurt and in Leuna – to select the optimal set-up for the potential facility. The commercial studies also need to be concluded before starting UPM’s regular process of analysing and preparing an investment decision.

OL3 power plant projectTeollisuuden Voima Oyj (TVO) is in the process of constructing a third nuclear power plant unit, OL3 EPR, at the Olkiluoto site (OL3). UPM participates in OL3 through its shareholding in Pohjolan Voima Oyj (PVO), which is the majority shareholder in TVO. UPM’s indirect share of OL3 is approximately 31%. The OL3 plant supplier, a consortium consisting of AREVA GmbH, AREVA NP SAS and Siemens AG (the Supplier), is constructing OL3 as a turnkey project.

The start of regular electricity production, originally scheduled for April 2009, has been revised several times by the Supplier. As announced by TVO in November 2018, TVO received from the Supplier an updated schedule for the commissioning of OL3 and, in accordance with the Supplier’s updated schedule, regular electricity generation at OL3 would commence in January 2020.

After the reporting period TVO has announced to have received an updated schedule for the commissioning of the OL3 plant unit from the plant Supplier. According to the received information, the regular electricity generation at the OL3 plant unit will start in July 2020. According to Supplier, nuclear fuel will be loaded into the reactor in January 2020 and the first connection to the grid will take place in April 2020. According to the commissioning program, the unit will produce 1-3 terawatt hours with varying power levels during the test program, which will begin from the connection to the grid and will end to the beginning of regular electricity production.

When completed, OL3 will supply electricity to its shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle electricity and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned. OL3 will increase UPM Energy’s electricity generation capacity significantly. The new power plant unit is expected to be highly efficient and meet the highest safety standards. Its power generation will be CO2-free and Olkiluoto will have a secure solution for the deposit of used fuel.

TIMING UNIT

Q2/2018 Fray Bentos pulp millKaukas pulp millLappeenranta biorefinery turnaroundOlkiluoto nuclear power plant

Q4/2018 Pietarsaari pulp millQ2/2019 Kymi pulp mill

Olkiluoto nuclear power plantQ4/2019 Fray Bentos pulp mill

Events during H1 2019On 9 January UPM announced its participation in the international public tendering process in the port of Montevideo organised by the National Ports Administration (ANP) of Uruguay.

In March, ANP awarded UPM the concession in the port. The scope of the concession is the construction and operation of a port terminal specialised in the storage and shipping of pulp, chemicals and other inputs related to pulp production with a capacity to handle approximately 2 million tonnes of pulp annually. The tenure of the concession is to be 50 years.

UPM’s financial commitment in the form of a performance bond would be USD 20 million at this stage. At the time of the potential investment decision on the pulp mill project described earlier in this report, UPM would proceed with the port investment decision and start of the construction of the port facilities. The preliminary UPM investment estimate for the port facilities would be approximately USD 260 million.

On 31 January UPM announced that it will invest in the refurbishment of Kuusankoski hydropower plant in Finland. The average annual production of the Kuusankoski plant is expected to increase from the current 180 GWh to 195 GWh. The investment will be completed by the end of 2022.

On 24 June UPM announced the decision to permanently close paper machine 10 at UPM Plattling, Germany, reducing the annual capacity of coated mechanical paper in Europe by approximately 155,000 tonnes. The paper machine was permanently closed in July 2019 and the number of persons affected is 155. UPM recognised restructuring charges of EUR 29 million as items affecting comparability in its Q2 2019 results. The expected annual cost savings total approximately EUR 17 million.

Events after the balance sheet dateOn 17 July 2019 TVO announced to have received an updated schedule for the commissioning of the OL3 EPR plant unit from the Supplier. According to the received information, the regular electricity generation at the OL3 plant unit will start in July 2020.

Timing of significant maintenance shutdowns in 2018 and 2019



UPM BiorefiningUPM Biorefining consists of pulp, timber and biofuels businesses. UPM Pulp offers a versatile range of responsibly-produced pulp grades suitable for a wide range of end-uses such as tissue, specialty paper, graphic papers and board. UPM Timber offers certified sawn timber for construction, joinery and furniture. UPM Biofuels produces wood-based renewable diesel for all diesel engines and renewable naphtha that can be used as a biocomponent for gasoline or for replacing fossil raw materials in petrochemical industry, for example. UPM has three pulp mills in Finland and one mill and plantation operations in Uruguay. UPM operates four sawmills and one biorefinery in Finland.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 708 753 775 754 694 668 1,461 1,363 2,892Comparable EBITDA, EURm 1) 203 254 282 297 199 233 457 432 1,011

% of sales 1) 28.6 33.8 36.4 39.3 28.6 34.9 31.3 31.7 35.0Change in fair value of forest assets and wood harvested, EURm 1)

–1 –1 –3 –3 –6 – –1 –6 –12

Share of results of associated companies and joint ventures, EURm

1 1 – 1 – – 1 1 2

Depreciation, amortisation and impairment charges, EURm

–42 –42 –39 –39 –39 –38 –84 –77 –155

Operating profit, EURm 161 212 241 256 155 195 373 350 847% of sales 22.7 28.2 31.1 33.9 22.3 29.2 25.5 25.7 29.3

Items affecting comparability in operating profit, EURm – – – – – – – – –Comparable EBIT, EURm 161 212 241 256 155 195 373 350 847

% of sales 22.7 28.2 31.1 33.9 22.3 29.2 25.5 25.7 29.3Capital employed (average), EURm 3,491 3,481 3,267 3,224 3,153 3,074 3,486 3,114 3,180Comparable ROCE, % 18.4 24.4 29.5 31.7 19.7 25.4 21.4 22.5 26.6Pulp deliveries, 1,000 t 877 915 912 870 835 850 1,793 1,685 3,468

• Maintenance shutdown at UPM Kymi pulp mill in Finland• Strong performance for UPM Biofuels

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for UPM Biorefining increased due to higher pulp delivery volumes. Fixed costs were lower due to lower maintenance. Wood costs were higher in Finland.

The average price in euro for UPM’s pulp deliveries decreased by 6%.

Q2 2019 compared with Q1 2019Comparable EBIT decreased due to lower pulp sales prices. Fixed costs were higher due to scheduled maintenance activity.

The average price in euro for UPM’s pulp deliveries decreased by 5%.

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Biorefining increased due to higher pulp delivery volumes and lower fixed costs. Variable costs increased due to higher wood costs in Finland.

The average price in euro for UPM’s pulp deliveries remained unchanged.

Market environment• Global chemical pulp demand growth slowed down in the first half

of 2019. Uncertainties in the global economy and destocking in the value chain continued to impact somewhat upon global market pulp shipments.

• In Europe and China, the market price of both northern bleached softwood kraft (NBSK) pulp and bleached hardwood kraft pulp (BHKP) decreased in the second quarter of 2019 compared to the previous quarter.

• In the first half of 2019 the average European market price in euro was 6% higher for NBSK and 1% higher for BHKP compared to the previous year. In China the average market price in US dollars was 23% lower for NBSK and 14% lower for BHKP compared to the previous year.

• Demand for advanced renewable diesel and naphtha continued to be strong.

• Demand growth for sawn timber continued albeit at lower level. Uncertainties in the global economy and destocking in the value chain continued to impact market prices.

Source: FOEX

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Pulp mill maintenance shutdowns: Q2 2019 Kymi, Q4 2018 Pietarsaari, Q2 2018 UPM Fray Bentos and UPM Kaukas.




UPM EnergyUPM Energy creates value through cost competitive, low-emission electricity generation and through physical and financial electricity trading as well as energy optimisation services for industrial consumers. UPM Energy is the second largest electricity producer in Finland. UPM’s power generation capacity consists of hydropower, nuclear power and condensing power.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 93 113 100 101 83 107 206 191 391Comparable EBITDA, EURm 51 41 34 31 23 44 92 67 132

% of sales 55.1 36.0 34.1 30.8 27.2 41.1 44.7 35.0 33.7Depreciation, amortisation and impairment charges, EURm

–2 –2 –2 –2 –2 –2 –4 –4 –9

Operating profit, EURm 49 39 23 29 20 42 87 63 114 % of sales 52.2 34.2 22.9 28.7 24.7 39.2 42.3 32.8 29.2Items affecting comparability in operating profit, EURm 1) –1 – –9 – – – –1 – –9Comparable EBIT, EURm 49 39 32 29 20 42 88 63 123 % of sales 52.9 34.2 31.9 28.7 24.7 39.2 42.6 32.8 31.5Capital employed (average), EURm 2,460 2,463 2,419 2,343 2,321 2,301 2,462 2,311 2,346Comparable ROCE, % 8.0 6.3 5.3 4.9 3.5 7.3 7.1 5.4 5.3Electricity deliveries, GWh 2,121 2,173 2,103 2,128 2,004 2,373 4,294 4,377 8,608

• Maintenance shutdown at Olkiluoto nuclear power plant• Improving hydro generation volumes

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for UPM Energy increased due to materially higher electricity sales prices and higher nuclear and hydropower generation. Fixed costs for nuclear were lower.

UPM’s average electricity sales price increased by 11% to EUR 38.9/MWh (34.9/MWh).

Q2 2019 compared with Q1 2019Comparable EBIT increased due to higher hydropower generation. Sales prices were lower. Fixed costs for nuclear were lower offsetting the negative impact of the maintenance shutdown at the Olkiluoto nuclear power plant.

UPM’s average electricity sales price decreased by 11% to EUR 38.9/MWh (43.7/MWh).

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Energy increased due to higher electricity sales prices and higher nuclear generation. Fixed costs for nuclear were lower.

UPM’s average electricity sales price increased by 13% to EUR 41.3/MWh (36.4/MWh).

Market environment• The Nordic hydrological balance improved in the second quarter

of 2019 and was close to normal at the end of June. • Coal prices in Q2 2019 decreased compared to the same period

in the previous year. The CO2 emission allowance price of EUR 26.3/tonne at the end of Q2 2019 was higher than a year ago (EUR 15.0/tonne).

• The average Finnish area spot price on the Nordic electricity exchange for the first half of 2019 was EUR 42.4/MWh, 1% higher than in the same period last year (42.0/MWh).

• The front-year forward electricity price for the Finnish area closed at EUR 40.0/MWh in June, 4% higher than at the end of Q1 2019 (38.4/MWh).

Sources: The Norwegian Water Resources and Energy Directorate, Svensk Energi, Finnish Environment Institute, Nord Pool, Nasdaq OMX, Bloomberg, UPM

1) In Q2 2019 and Q4 2018, items affecting comparability relate to restructuring of ownership in Meri-Pori power plant.

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% of salesEURm



UPM RaflatacUPM Raflatac manufactures self-adhesive label materials for product and information labelling in the food, beverage, personal care, pharmaceutical and retail segments, for example. UPM Raflatac is the second-largest producer of self-adhesive label materials worldwide.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 385 398 397 374 371 345 783 717 1,488Comparable EBITDA, EURm 40 40 35 41 44 36 80 80 156


–10 –10 –7 –8 –7 –7 –20 –15 –30

Operating profit, EURm 30 26 27 33 37 29 56 65 126% of sales 7.8 6.5 6.9 8.9 9.9 8.3 7.1 9.1 8.5Items affecting comparability in operating profit, EURm 1) – –5 – – – – –5 – –Comparable EBIT, EURm 30 31 27 33 37 29 60 65 126% of sales 7.7 7.7 6.9 8.9 9.9 8.3 7.7 9.1 8.5Capital employed (average), EURm 590 586 543 538 540 519 588 530 535Comparable ROCE, % 20.1 20.9 20.2 24.8 27.3 22.0 20.5 24.7 23.6

• New service terminal was opened in Chelyabinsk in Russia• Sales growth in Q2 was mainly driven by higher sales prices and

mix

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for UPM Raflatac decreased due to higher variable costs and unfavourable changes in currencies more than offsetting the positive impact of higher sales prices.

Q2 2019 compared with Q1 2019Comparable EBIT decreased slightly due to lower delivery volumes offsetting the positive impact of higher sales margin.

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Raflatac decreased due to higher variable costs and unfavourable changes in currencies more than offsetting the positive impact of higher sales prices and delivery volumes. Fixed costs were lower.

Market environment• Demand growth for self-adhesive label materials continued stable

in North America and in Asia. European demand has slowed down and in Q2 the market declined slightly.

Sources: FINAT, TLMI

Q118

Q218

Q318

Q418

Q219

Q119

40

32

24

16

8

0

15

12

9

6

3

0

Comparable EBIT

% of salesEURm

1) In Q1 2019, items affecting comparability relate to restructuring charges.



UPM Specialty PapersUPM Specialty Papers serves growing global markets with labelling materials and release liners, office and graphic papers as well as packaging papers for labelling, commercial siliconising, flexible packaging, wrapping and printing. The operations consist of the UPM Changshu and UPM Tervasaari mills in China and Finland, as well as label and packaging papers production lines at the UPM Jämsänkoski mill in Finland. The main customers are label stock manufacturers, paper converters, merchants and distributors and packaging customers.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 359 357 364 354 368 343 716 710 1,429Comparable EBITDA, EURm 45 29 23 34 53 56 74 109 167


–19 –21 –19 –19 –20 –19 –39 –39 –77

Operating profit, EURm 26 8 4 15 33 37 35 70 90 % of sales 7.4 2.4 1.0 4.4 9.0 10.9 4.9 9.9 6.3Items affecting comparability in operating profit, EURm – – – – – – – – –Comparable EBIT, EURm 26 8 4 15 33 37 35 70 90 % of sales 7.4 2.4 1.0 4.4 9.0 10.9 4.9 9.9 6.3Capital employed (average), EURm 892 908 901 896 887 874 900 880 889Comparable ROCE, % 11.8 3.7 1.7 6.9 15.0 17.1 7.7 16.0 10.1Paper deliveries, 1,000 t 390 386 393 389 393 379 776 772 1,554

• Profitability recovered mainly due to lower pulp costs• Cost reduction measures resulted in lower fixed costs• Ongoing investments in Germany and China

ResultsQ2 2019 compared with Q2 2018Comparable EBIT for UPM Specialty Papers decreased due to impact of reducing stocks. Fine paper sales prices were lower and offset the positive impact of lower pulp costs. Changes in currencies were unfavourable. Fixed costs decreased.

Q2 2019 compared with Q1 2019Comparable EBIT increased mainly due to lower pulp costs. Sales prices were higher.

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Specialty Papers decreased due to impact of reducing stocks, lower fine paper sales prices and unfavourable changes in currencies. Fixed costs were lower.

Market environment• In the Asia-Pacific region, fine paper demand was solid especially

during Q2 2019. China fine paper market prices increased in the first half of 2019.

• Label, release and packaging paper demand was solid in the first half of 2019 and sales prices were stable.

Sources: UPM, RISI, Pöyry, AWA

Q118

Q218

Q318

Q418

Q219

Q119

50

40

30

20

10

0

15

12

9

6

3

0

Comparable EBIT

% of salesEURm



UPM Communication PapersUPM Communication Papers offers an extensive product range of graphic papers for advertising and publishing as well as home and office uses. The business has extensive low-cost operations consisting of 15 efficient paper mills in Europe and the United States, a global sales network and an efficient logistic system. The main customers are publishers, cataloguers, retailers, printers and merchants.

• UPM decided to permanently close paper machine 10 at UPM Plattling, Germany

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for UPM Communication Papers decreased due to lower deliveries and the impact of reducing stocks more than offsetting the positive impact of higher sales prices.

The average price in euro for UPM’s paper deliveries increased by 9%.

Q2 2019 compared with Q1 2019Comparable EBIT decreased due to impact of reducing stocks, lower delivery volumes and seasonally higher fixed costs. Variable costs were lower, especially for pulp and energy.

The average price in euro for UPM’s paper deliveries remained unchanged.

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Communication Papers increased due to higher sales prices. Delivery volumes were lower. Variable costs were higher.

The average price in euro for UPM’s paper deliveries increased by 11%.

Market environment• In the first half of 2019 demand for graphic papers in Europe was

9% lower than last year. Newsprint demand decreased by 8%, magazine paper by 11% and fine paper by 8% compared with the first half of 2018.

• In Q2 2019 publication paper prices in Europe were at the same level as the first quarter of 2019. Compared to Q2 2018 publication paper prices were on average 11% higher. In Q2 2019 fine paper prices in Europe were on average 1% lower than in the previous quarter. Compared to Q2 2018 fine paper prices were on average 5% higher.

• In the first half of 2019 demand for magazine papers in North America decreased by 13% compared to the same period last year. The average price in US dollars for magazine papers in Q2 2019 decreased by 1% compared to Q1 2019 and increased by 7% compared to Q2 2018.

Sources: PPI/RISI, Euro-Graph, PPPC

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 1,138 1,200 1,206 1,209 1,149 1,126 2,338 2,275 4,690Comparable EBITDA, EURm 98 118 99 97 101 84 215 185 381

% of sales 8.6 9.8 8.2 8.0 8.8 7.5 9.2 8.1 8.1Share of results of associated companies and joint ventures, EURm

– – 1 1 – – – – 2


–34 –33 –28 –28 –29 –30 –67 –59 –116

Operating profit, EURm 36 85 71 69 88 85 121 173 312 % of sales 3.2 7.1 5.9 5.7 7.7 7.5 5.2 7.6 6.7Items affecting comparability in operating profit, EURm 1) –29 – –1 – 17 30 –29 47 46Comparable EBIT, EURm 65 85 72 69 72 54 150 126 267 % of sales 5.7 7.1 6.0 5.7 6.3 4.8 6.4 5.5 5.7Capital employed (average), EURm 1,663 1,759 1,631 1,605 1,591 1,580 1,711 1,585 1,602Comparable ROCE, % 15.6 19.3 17.7 17.1 18.1 13.7 17.5 15.9 16.7Paper deliveries, 1,000 t 1,666 1,746 1,865 1,879 1,842 1,855 3,412 3,697 7,442

1) In Q2 2019, items affecting comparability relate to closure of paper machine 10 at UPM Plattling mill, Germany. In Q4 2018, items affecting comparability relate to prior capacity closures. In Q2 2018, items affecting comparability include EUR 18 million income relating to reversal of unused restructuring provisions in Finland and Germany and EUR 1 million loss relating to sale of Myllykoski mill site in Finland. In Q1 2018, items affecting comparability relate to sale of hydropower assets located in Schongau and Ettringen mill sites in Germany.

Q118

Q218

Q318

Q418

Q219

Q119

100

80

60

40

20

0

10

8

6

4

2

0

Comparable EBIT

% of salesEURm



UPM PlywoodUPM Plywood offers plywood and veneer products, mainly for construction, vehicle flooring and LNG shipbuilding, as well as other industrial applications. Production facilities are located in Finland, Estonia and Russia.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 120 123 119 112 125 125 243 250 480Comparable EBITDA, EURm 19 19 15 13 22 24 38 47 75


–6 –6 –6 –6 –6 –6 –12 –12 –23

Operating profit, EURm 13 13 9 7 16 19 26 35 52% of sales 10.7 10.5 8.0 6.6 13.2 14.9 10.6 14.0 10.8Items affecting comparability in operating profit, EURm – – – – – – – – –Comparable EBIT, EURm 13 13 9 7 16 19 26 35 52% of sales 10.7 10.5 8.0 6.6 13.2 14.9 10.6 14.0 10.8Capital employed (average), EURm 336 321 301 282 280 269 328 274 283Comparable ROCE, % 15.2 16.1 12.6 10.5 23.6 27.6 15.6 25.6 18.4Plywood deliveries, 1,000 m3 193 196 189 188 206 209 389 414 791

• UPM Chudovo plywood mill expansion investment in Russia is proceeding in schedule

• UPM Plywood published Environmental Product Declarations (EPD) for the WISA products

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for UPM Plywood decreased due to lower delivery volumes and higher variable costs.

Q2 2019 compared with Q1 2019Comparable EBIT remained at the same level.

January–June 2019 compared with January–June 2018Comparable EBIT for UPM Plywood decreased due to lower delivery volumes and higher costs. Sales prices were higher.

Market environment• Market demand in Europe was stable in the first half of 2019.

Demand for spruce plywood was stable, driven by the building and construction industry. Demand for birch plywood-related industrial applications was stable. However, competition remained intense in the birch-trading business.

Source: UPM

Q118

Q218

Q318

Q418

Q219

Q119

25

20

15

10

5

0

25

20

15

10

5

0

Comparable EBIT

% of salesEURm



Other operationsWood Sourcing and Forestry secures competitive wood and biomass for UPM businesses and manages UPM-owned and privately-owned forests in North Europe. In addition, UPM offers forestry services to forest owners and forest investors. UPM Biochemicals and UPM Biocomposites business units as well as group services are also included in Other operations.

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 72 68 87 80 83 76 140 159 326Comparable EBITDA, EURm 1) 3 –8 –14 –2 1 –13 –5 –12 –28Change in fair value of forest assets and wood harvested, EURm 1)

–3 6 383 30 3 3 3 6 419

Share of results of associated companies and joint ventures, EURm

– – – – – 1 – 2 2


–7 –6 –3 –3 –3 –3 –13 –7 –13

Operating profit, EURm –9 –9 365 25 0 –12 –18 –11 380Items affecting comparability in operating profit, EURm 2) –2 – 345 – – – –2 – 345Comparable EBIT, EURm –6 –9 21 25 0 –12 –15 –11 35Capital employed (average), EURm 1,807 1,801 1,447 1,360 1,378 1,384 1,804 1,381 1,392Comparable ROCE, % –1.4 –2.0 5.8 7.5 0.1 –3.4 –1.7 –1.6 2.5

ResultsQ2 2019 compared with Q2 2018 Comparable EBIT for other operations decreased. The change in the fair value of forest assets net of wood harvested was EUR –3 million (3 million). The increase in the fair value of forest assets was EUR 13 million (23 million). The cost of wood harvested from UPM forests was EUR 15 million (20 million).

Q2 2019 compared with Q1 2019Comparable EBIT increased. The change in the fair value of forest assets net of wood harvested was EUR –3 million (6 million). The increase in the fair value of forest assets was EUR 13 million (15 million). The cost of wood harvested from UPM forests was EUR 15 million (9 million).

January–June 2019 compared with January–June 2018Comparable EBIT for other operations decreased. The change in the fair value of forest assets net of wood harvested was EUR 3 million (6 million). The increase in the fair value of forest assets was EUR 28 million (37 million). The cost of wood harvested from UPM forests was EUR 25 million (31 million).

1) The 2018 comparative figures have been restated due to accounting policy change of forest renewal costs. Refer to » Basis of preparation and accounting policies.2) In Q2 2019, items affecting comparability relate to sale of Voikkaa mill site in Finland. In Q4 2018, items affecting comparability of EUR 345 million relate to increase in the fair value of the forest assets in Finland, mainly due to higher forest growth estimates.

Q118

Q218

Q318

Q418

Q219

Q119

30

24

18

12

6

0

Comparable EBIT

EURm



Risks and near-term uncertaintiesThe main uncertainties in UPM’s earnings relate to the sales prices and delivery volumes of the group’s products, as well as to changes to the main input cost items and currency exchange rates. Most of these items depend on general economic developments.

There are significant uncertainties related to global economic growth in 2019. Economists continue to expect GDP growth in 2019 but have, in recent months, gradually revised down their estimates for many regions. Trade negotiations between China and the US, the undefined nature of Brexit and political uncertainties in several other countries add to the uncertainty.

There are uncertainties regarding the growth outlook in developing economies, including China, which may significantly influence the overall global economy and many of UPM’s product markets in particular. Uncertainties related to trade tariffs and other possible protectionist policies add to the risks. China accounted for 11.3% of UPM’s sales in 2018.

The UK has decided to leave the EU, and this was scheduled to take place at the end of March 2019. However, the nature of the exit remains unknown. This represents increased uncertainty and risks related to economic growth, especially in the UK and the EU. The EU is the most significant market for UPM, representing 57.6% of the company’s sales in 2018. The UK accounted for 6.3% of UPM’s sales.

Changes to the monetary policies of major central banks may significantly impact various currencies that directly or indirectly affect UPM.

In Finland, UPM is participating in a project to construct a new nuclear power plant unit Olkiluoto 3 EPR (OL3) through its shareholdings in Pohjolan Voima Oyj. Pohjolan Voima Oyj is a majority shareholder of Teollisuuden Voima Oyj (TVO), holding 58.5% of its shares. UPM’s indirect share of OL3 is approximately 31%.

According to TVO OL3 was procured as a fixed price turnkey project from a consortium formed by Areva GmbH, Areva NP SAS and Siemens AG (the Supplier). The consortium companies have under the plant contract joint and several liability for the contractual obligations.

Originally the commercial electricity production of the OL3 was scheduled to start in April 2009. The completion of the project, however, has been delayed. As announced by TVO, in accordance with the schedule updated by the Supplier in November 2018, the regular electricity generation at the plant unit will commence in January 2020.

In March 2018 TVO announced it had signed a comprehensive settlement agreement with the Supplier and Areva Group parent company, Areva SA, a company wholly owned by the French State. The settlement agreement concerns the completion of the OL3 project and related disputes and entered into force in late March. According to TVO, pursuant to the settlement agreement TVO and the Supplier jointly withdrew the pending arbitration proceedings under the International Chamber of Commerce (ICC) rules with respect to costs and losses incurred in relation to delays in the construction of the OL3 project.

In July 2018 TVO announced that in June 2018 the ICC tribunal had confirmed the arbitration settlement by a consent award, and the arbitration proceedings had been terminated. The parties also withdrew the pending appeals in the General Court of the European Union.

According to TVO the settlement agreement stipulates as follows: To provide and maintain adequate and competent technical and human resources for the completion of the OL3 project, Areva will source the necessary additional resources from Framatome S.A.S., whose majority owner is EDF.

The supplier consortium companies undertake that the funds dedicated to the completion of the OL3 project will be adequate and will cover all applicable guarantee periods, including setting up a trust mechanism funded by Areva companies to secure the financing of the costs of completion of the OL3 project.

The turnkey principle of the OL3 plant contract and the joint and several liability of the supplier consortium companies remain in full force.

The agreement also noted the plant Supplier’s schedule at the time the agreement was signed, according to which regular electricity production in the unit would have commenced in May 2019.

The ICC arbitration concerning the costs and losses caused by the delay of the OL3 project is settled by financial compensation of EUR 450 million to be paid to TVO in two installments by the Supplier.

The parties withdraw all on-going legal actions related to OL3, including the ICC Arbitration and appeals in the General Court of the European Union.

The supplier consortium companies are entitled to receive an incentive payment, in a maximum amount of EUR 150 million, upon timely completion of the OL3 project. In the event that the supplier consortium companies fail to complete the OL3 project by the end of 2019, the supplier consortium companies will pay a penalty to TVO for such delay in an amount which will depend on the actual time of completion of the OL3 project and may not exceed EUR 400 million.

After the reporting period TVO has announced to have received an updated schedule for the commissioning of the OL3 plant unit from the Supplier. According to the received information, the regular electricity generation at the OL3 plant unit will start in July 2020.

Further delays to the OL3 project could have an adverse impact on PVO’s business and financial position, the fair value of UPM’s energy shareholdings in PVO and/or the cost of energy sourced from OL3 when completed. It is possible that the cost of energy sourced from OL3 at the time when it starts regular electricity production will be higher than the market price of electricity at that time.

The main earnings sensitivities and the group’s cost structure are presented on pages 135–136 of the Annual Report 2018. Risks and opportunities are discussed on pages 30–31, and risks and risk management are presented on pages 106–109.



SharesIn H1 2019 UPM shares worth a total of EUR 4,828 million (4,825 million) were traded on the NASDAQ Helsinki stock exchange. This is estimated to represent more than 50% of all trading volume in UPM shares. The highest listing was EUR 28.48 in April and the lowest was EUR 21.60 in January.

The company’s ADSs are traded on the US over-the-counter (OTC) market under a Level 1-sponsored American Depositary Receipt programme.

The Annual General Meeting held on 4 April 2019 authorised the Board of Directors to decide on the repurchase of a maximum of 50,000,000 of the Company’s own shares. The authorisation will be valid for 18 months from the date of the AGM resolution.

The Annual General Meeting held on 4 April 2019 authorised the Board of Directors to decide on the issuance of new shares, transfer of treasury shares and issuance of special rights entitling to shares in proportion to the shareholders’ existing holdings in the Company, or in a directed share issue, deviating from the shareholder’s pre-emptive subscription right. The Board of Directors may also decide on a share issue without payment to the Company itself. The aggregate maximum number of new shares that may be issued and treasury shares that may be transferred is 25,000,000, including the number of shares that can be received on the basis of the special rights. The authorisation will be valid for 18 months from the date of the AGM resolution.

Aside from the above, the Board of Directors has no current authorisation to issue shares, convertible bonds or share options.

The number of shares entered in the Trade Register on 30 June 2019 was 533,735,699. Through the issuance authorisation, the number of shares may increase to a maximum of 558,735,699.

On 30 June 2019 the Company held 411,653 of its own shares, representing approximately 0.08% of the total number of company shares and voting rights. The Board of Directors may decide to retain, transfer or cancel the treasury shares.

LitigationIn 2012, UPM commenced arbitration proceedings against Metsäliitto Cooperative and Metsä Board Corporation due to their breaches of UPM’s tag-along right under the shareholders’ agreement concerning Metsä Fibre Oy in connection with the sale of shares in Metsä Fibre to Itochu Corporation. UPM claimed jointly from Metsäliitto and Metsä Board a capital amount of EUR 58.5 million. Metsäliitto and Metsä Board had sold a 24.9% holding in Metsä Fibre to Itochu Corporation for EUR 472 million. In connection with the transaction with Itochu, Metsäliitto had exercised a call option to purchase UPM’s remaining 11% shareholding in Metsä Fibre for EUR 150 million. The arbitral tribunal rendered its final decision (arbitral award) in February 2014 and ordered Metsäliitto and Metsä Board to pay UPM the capital amount of EUR 58.5 million and penalty interest and compensate UPM for its legal fees. As a result, UPM recorded an income of EUR 67 million as item affecting comparability in Q1 2014. In May 2014 Metsäliitto and Metsä Board commenced litigation proceedings in the Helsinki District Court challenging the arbitral award and requesting the District Court to set aside the arbitral award or to declare it null and void. In June 2015 the District Court rejected the actions by Metsäliitto and Metsä Board and following an appeal the Helsinki Court of Appeal rejected the actions by Metsäliitto and Metsä Board in October 2016. Metsäliitto and Metsä Board filed a request for leave of appeal with the Supreme Court. In March 2019 the Supreme Court rendered its decision denying Metsäliitto and Metsä Board leave to appeal as a result of which the judgement of the Court of Appeal remains final.

Helsinki, 23 July 2019

UPM-Kymmene CorporationBoard of Directors



Financial information

EURm Q2/2019RESTATED *)

Q2/2018 Q1–Q2/2019RESTATED *)

Q1–Q2/2018RESTATED *)

Q1–Q4/2018

Sales 2,605 2,589 5,298 5,102 10,483Other operating income 33 13 52 56 87Costs and expenses *) –2,196 –2,146 –4,421 –4,215 –8,665Change in fair value of forest assets and wood harvested *) –3 –3 2 – 407Share of results of associated companies and joint ventures 1 1 1 3 6Depreciation, amortisation and impairment charges –120 –106 –239 –212 –422Operating profit 319 349 692 734 1,895

Exchange rate and fair value gains and losses –1 2 –1 2 3Interest and other finance costs, net –19 –14 –28 –28 –60Profit before tax 300 337 664 708 1,839

Income taxes –55 –68 –115 –130 –342Profit for the period 245 269 549 577 1,496

Attributable to:Owners of the parent company 245 269 549 577 1,495Non-controlling interests – – – 1 1

245 269 549 577 1,496

Earnings per share for profit attributable to owners of the parent companyBasic earnings per share, EUR 0.46 0.50 1.03 1.08 2.80Diluted earnings per share, EUR 0.46 0.50 1.03 1.08 2.80

EURm Q2/2019 Q2/2018 Q1–Q2/2019 Q1–Q2/2018 Q1–Q4/2018

Profit for the period 245 269 549 577 1,496

Other comprehensive income for the period, net of taxItems that will not be reclassified to income statement:Actuarial gains and losses on defined benefit obligations –3 35 –71 54 –Changes in fair value of energy shareholdings –18 – –17 38 183Items that may be reclassified subsequently to income statement:Translation differences –46 89 36 47 62Net investment hedge 4 –14 –3 –8 –14Cash flow hedges 16 –13 –17 –24 13Other comprehensive income for the period, net of tax –48 98 –73 106 243Total comprehensive income for the period 197 366 477 684 1,739

Total comprehensive income attributable to:Owners of the parent company 197 366 476 683 1,738Non-controlling interests – – – 1 1

197 366 477 684 1,739

Consolidated income statement

Consolidated statement of comprehensive income

*) Accounting policy change of forest renewal costs.



EURm 30 JUN 2019 30 JUN 2018 31 DEC 2018

ASSETSGoodwill 236 234 236Other intangible assets 326 311 295Property, plant and equipment 4,033 4,213 4,186Leased assets 580 – –Forest assets 1,972 1,614 1,945Energy shareholdings 2,139 2,011 2,159Other non-current financial assets 186 182 178Deferred tax assets 404 396 397Net retirement benefit assets 11 100 38Investments in associates and joint ventures 33 30 32Other non-current assets 23 37 34Non-current assets 9,942 9,127 9,501

Inventories 1,542 1,471 1,642Trade and other receivables 1,798 1,800 1,833Other current financial assets 91 95 107Income tax receivables 48 19 24Cash and cash equivalents 678 369 888Current assets 4,156 3,753 4,496

Assets 14,098 12,881 13,996

EQUITY AND LIABILITIESShare capital 890 890 890Treasury shares –2 –2 –2Translation reserve 265 222 232Other reserves 1,733 1,588 1,778Reserve for invested non-restricted equity 1,273 1,273 1,273Retained earnings 5,394 4,759 5,623Equity attributable to owners of the parent company 9,552 8,729 9,792Non-controlling interests 5 4 5Equity 9,556 8,734 9,797

Deferred tax liabilities 543 461 535Net retirement benefit liabilities 739 675 679Provisions 141 132 126Non-current debt 1,126 750 753Other non-current financial liabilities 74 87 101Non-current liabilities 2,623 2,104 2,194

Current debt 138 207 25Trade and other payables 1,721 1,722 1,881Other current financial liabilities 31 91 78Income tax payables 30 23 22Current liabilities 1,919 2,043 2,005Liabilities 4,542 4,147 4,199

Equity and liabilities 14,098 12,881 13,996

Consolidated balance sheet



Consolidated statement of changes in equity

EURmSHARE

CAPITALTREASURY

SHARESTRANSLATION

RESERVEOTHER

RESERVES

RESERVE FOR

INVESTED NON-

RESTRICTED EQUITY

RETAINED EARNINGS

EQUITY ATTRIBUTABLE

TO OWNERS OF THE

PARENT COMPANY

NON-CONTROLLING

INTERESTRSTOTAL

EQUITY

Value at 31 December 2018 890 –2 232 1,778 1,273 5,623 9,792 5 9,797Impact of adoption of IFRS 16 1) – – – – – –6 –6 – –6Value at 1 January 2019 890 –2 232 1,778 1,273 5,617 9,786 5 9,791Profit for the period – – – – – 549 549 – 549Translation differences – – 36 – – – 36 – 36Cash flow hedges – reclassified to income statement, net of tax

– – – 3 – – 3 – 3

Cash flow hedges – changes in fair value, net of tax

– – – –20 – – –20 – –20

Net investment hedge, net of tax – – –3 – – – –3 – –3Energy shareholdings – changes in fair value, net of tax

– – – –18 – 1 –17 – –17

Actuarial gains and losses on defined benefit plans, net of tax

– – – – – –71 –71 – –71

Total comprehensive income for the period

– – 33 –35 – 479 476 – 477

Share-based payments, net of tax – – – –10 – –8 –18 – –18Dividend distribution – – – – – –693 –693 – –693Total transactions with owners for the period

– – – –10 – –702 –711 – –711

Value at 30 June 2019 890 –2 265 1,733 1,273 5,394 9,552 5 9,556

Value at 1 January 2018 890 –2 184 1,590 1,273 4,750 8,684 4 8,687Profit for the period – – – – – 577 577 1 577Translation differences – – 47 – – – 47 – 47Cash flow hedges – reclassified to income statement, net of tax

– – – –20 – – –20 – –20

Cash flow hedges – changes in fair value, net of tax

– – – –4 – – –4 – –4

Net investment hedge, net of tax – – –8 – – – –8 – –8Energy shareholdings – changes in fair value, net of tax

– – – 38 – – 38 – 38

Actuarial gains and losses on defined benefit plans, net of tax

– – – – – 54 54 – 54

Total comprehensive income for the period

– – 38 14 – 630 683 1 684

Share-based payments, net of tax – – – –16 – –8 –24 – –24Dividend distribution – – – – – –613 –613 – –613Total transactions with owners for the period

– – – –16 – –621 –637 – –637

Value at 30 June 2018 890 –2 222 1,588 1,273 4,759 8,729 4 8,734

1) More information on changes in group’s accounting policies is presented under » Basis of preparation and accounting policies.



Condensed consolidated cash flow statement

EURm Q1–Q2/2019RESTATED *)

Q1–Q2/2018RESTATED *)

Q1–Q4/2018

Cash flows from operating activitiesProfit for the period 549 577 1,496Adjustments 387 249 301Change in working capital –64 –162 –209Finance costs, net –24 –19 –31Income taxes paid –92 –103 –228Operating cash flow 756 542 1,330

Cash flows from investing activitiesCapital expenditure –143 –139 –303Additions to forest assets –24 –25 –49Asset sales and other investing cash flow –26 43 153Investing cash flow –193 –120 –199

Cash flows from financing activitiesChange in loans and other financial items **) –40 –152 –338Lease repayments **) –41 –3 –7Dividends paid –693 –613 –613Financing cash flow –774 –768 –959

Change in cash and cash equivalents –211 –347 172

Cash and cash equivalents at beginning of period 888 716 716Exchange rate effect on cash and cash equivalents – –1 –Change in cash and cash equivalents –211 –347 172Cash and cash equivalents at end of period 678 369 888

*) Accounting policy change of forest renewal costs.**) Repayments of finance leases under IAS 17 have been reclassified from Change in loans and other financial items to Lease repayments.



Quarterly key figures

Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Sales, EURm 2,605 2,693 2,731 2,650 2,589 2,512 5,298 5,102 10,483Comparable EBITDA, EURm 1) 466 488 473 497 442 456 954 898 1,868 % of sales 1) 17.9 18.1 17.3 18.7 17.1 18.2 18.0 17.6 17.8Comparable EBIT, EURm 345 374 404 420 334 355 719 689 1,513% of sales 13.2 13.9 14.8 15.9 12.9 14.1 13.6 13.5 14.4Comparable profit before tax, EURm 325 366 390 404 322 341 691 663 1,457Capital employed (average), EURm 11,069 10,946 10,259 9,817 9,712 9,755 10,698 9,734 10,176Comparable ROCE, % 12.2 13.7 15.5 16.8 13.6 14.3 13.3 14.0 14.6Comparable profit for the period, EURm 271 305 319 330 258 288 576 545 1,194Total equity, average, EURm 9,804 9,924 9,491 8,959 8,856 8,821 9,677 8,699 9,230Comparable ROE, % 11.1 12.3 13.4 14.6 11.6 13.0 11.9 12.5 12.9Average number of shares basic (1,000) 533,324 533,324 533,324 533,324 533,324 533,324 533,324 533,324 533,324Comparable EPS, EUR 0.51 0.57 0.60 0.61 0.48 0.54 1.08 1.02 2.24Items affecting comparability in operating profit, EURm

–26 –1 340 –3 15 30 –27 44 382

Items affecting comparability in financial items, EURm

– – – – – – – – –

Items affecting comparability in taxes, EURm –1 – –68 1 –3 –9 – –12 –80Operating cash flow, EURm 1) 436 320 384 405 328 214 756 542 1,330Operating cash flow per share, EUR 1) 0.82 0.60 0.72 0.76 0.61 0.40 1.42 1.02 2.49Net debt at the end of period, EURm 366 –5 –311 4 401 41 366 401 –311Net debt to EBITDA (last 12 m.) 1) 0.19 –0.00 –0.17 0.00 0.22 0.02 0.19 0.22 –0.17Gearing ratio, % 4 0 –3 0 5 0 4 5 –3Equity per share at the end of period, EUR 17.91 18.84 18.36 17.21 16.37 16.83 17.91 16.37 18.36Capital expenditure, EURm 71 62 109 76 76 43 133 119 303Capital expenditure excluding acquisitions, EURm 71 62 109 76 76 43 133 119 303Personnel at the end of period 19,760 19,008 18,978 19,076 19,836 19,027 19,760 19,836 18,978

In addition to the conventional financial performance measures established by the IFRS, certain key figures (alternative performance measures) are presented to reflect the underlying business performance and enhance comparability from period to period.

The definitions of alternative performance measures are presented in other financial information in » UPM Annual Report 2018.




EURm, OR AS INDICATED Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q2/19 Q1–Q2/18 Q1–Q4/18

Items affecting comparabilityImpairment charges –1 – – – – – –1 – –Restructuring charges –28 –5 –10 – 18 – –33 19 9Change in fair value of unrealised cash flow and commodity hedges

6 4 6 –3 –2 – 10 –3 –

Capital gains and losses on sale of non-current assets

–2 – – – –2 30 –2 28 29

Fair value changes of forest assets resulting from changes in estimates

– – 345 – – – – – 345

Total items affecting comparability in operating profit

–26 –1 340 –3 15 30 –27 44 382

Items affecting comparability in financial items – – – – – – – – –Items affecting comparability in taxes –1 – –68 1 –3 –9 – –12 –80Items affecting comparability, total –26 –1 272 –2 11 21 –27 32 302

Comparable EBITDAOperating profit 319 373 744 417 349 385 692 734 1,895Depreciation, amortisation and impairment charges excluding items affecting comparability

118 120 105 105 106 106 238 212 422

Change in fair value of forest assets and wood harvested excluding items affecting comparability 1)

3 –5 –35 –27 3 –3 –2 – –63

Share of result of associates and joint ventures –1 –1 –1 –2 –1 –2 –1 –3 –6Items affecting comparability in operating profit 26 1 –340 3 –15 –30 27 –44 –382Comparable EBITDA 1) 466 488 473 497 442 456 954 898 1,868 % of sales 1) 17.9 18.1 17.3 18.7 17.1 18.2 18.0 17.6 17.8

Comparable EBITOperating profit 319 373 744 417 349 385 692 734 1,895Items affecting comparability in operating profit 26 1 –340 3 –15 –30 27 –44 –382Comparable EBIT 345 374 404 420 334 355 719 689 1,513 % of sales 13.2 13.9 14.8 15.9 12.9 14.1 13.6 13.5 14.4

Comparable profit before taxProfit before tax 300 364 731 401 337 371 664 708 1,839Items affecting comparability in operating profit 26 1 –340 3 –15 –30 27 –44 –382Items affecting comparability in financial items – – – – – – – – –Comparable profit before tax 325 366 390 404 322 341 691 663 1,457

Comparable ROCE, % Comparable profit before tax 325 366 390 404 322 341 691 663 1,457Interest expenses and other financial expenses 11 8 7 9 8 9 20 17 33

337 374 397 413 330 350 711 680 1,490Capital employed, average 11,069 10,946 10,259 9,817 9,712 9,755 10,698 9,734 10,176Comparable ROCE, % 12.2 13.7 15.5 16.8 13.6 14.3 13.3 14.0 14.6

Comparable profit for the periodProfit for the period 245 304 591 328 269 309 549 577 1,496Items affecting comparability, total 26 1 –272 2 –11 –21 27 –32 –302Comparable profit for the period 271 305 319 330 258 288 576 545 1,194

Comparable EPS, EURComparable profit for the period 271 305 319 330 258 288 576 545 1,194Profit attributable to non-controlling interest – – 2 –2 – –1 – –1 –1

271 305 321 328 258 287 576 545 1,193Average number of shares basic (1,000) 533,324 533,324 533,324 533,324 533,324 533,324 533,324 533,324 533,324Comparable EPS, EUR 0.51 0.57 0.60 0.61 0.48 0.54 1.08 1.02 2.24

Reconciliation of key figures to IFRS




Reconciliation of key figures to IFRS


Comparable ROE, %Comparable profit for the period 271 305 319 330 258 288 576 545 1,194Total equity, average 9,804 9,924 9,491 8,959 8,856 8,821 9,677 8,699 9,230Comparable ROE, % 11.1 12.3 13.4 14.6 11.6 13.0 11.9 12.5 12.9

Net debtNon-current debt 1,126 1,139 753 732 750 720 1,126 750 753Current debt 138 127 25 25 207 34 138 207 25Total debt 1) 1,264 1,267 778 757 957 755 1,264 957 778Non-current interest-bearing assets 184 177 171 158 167 165 184 167 171Cash and cash equivalents 678 1,064 888 549 369 528 678 369 888Other current interest-bearing assets 36 31 30 46 20 20 36 20 30Total interest-bearing assets 898 1,272 1,089 753 556 714 898 556 1,089Net debt 366 –5 –311 4 401 41 366 401 –311

1) Total debt increased in 2019 as a result of the adoption of IFRS 16 Leases 1 January 2019. Refer to » Basis of preparation and accounting policies.



Quarterly information by business area


SalesUPM Biorefining 708 753 775 754 694 668 1,461 1,363 2,892UPM Energy 93 113 100 101 83 107 206 191 391UPM Raflatac 385 398 397 374 371 345 783 717 1,488UPM Specialty Papers 359 357 364 354 368 343 716 710 1,429UPM Communication Papers 1,138 1,200 1,206 1,209 1,149 1,126 2,338 2,275 4,690UPM Plywood 120 123 119 112 125 125 243 250 480Other operations 72 68 87 80 83 76 140 159 326Internal sales –269 –320 –318 –334 –289 –279 –590 –568 –1,220Eliminations and reconciliations 1 2 1 – 4 1 2 5 7Sales, total 2,605 2,693 2,731 2,650 2,589 2,512 5,298 5,102 10,483

Comparable EBITDAUPM Biorefining 1) 203 254 282 297 199 233 457 432 1,011UPM Energy 51 41 34 31 23 44 92 67 132UPM Raflatac 40 40 35 41 44 36 80 80 156UPM Specialty Papers 45 29 23 34 53 56 74 109 167UPM Communication Papers 98 118 99 97 101 84 215 185 381UPM Plywood 19 19 15 13 22 24 38 47 75Other operations 1) 3 –8 –14 –2 1 –13 –5 –12 –28Eliminations and reconciliations 8 –4 –2 –15 – –9 4 –9 –26Comparable EBITDA, total 1) 466 488 473 497 442 456 954 898 1,868

Operating profit UPM Biorefining 161 212 241 256 155 195 373 350 847UPM Energy 49 39 23 29 20 42 87 63 114UPM Raflatac 30 26 27 33 37 29 56 65 126UPM Specialty Papers 26 8 4 15 33 37 35 70 90UPM Communication Papers 36 85 71 69 88 85 121 173 312UPM Plywood 13 13 9 7 16 19 26 35 52Other operations –9 –9 365 25 0 –12 –18 –11 380Eliminations and reconciliations 14 – 4 –18 –2 –9 14 –12 –25Operating profit, total 319 373 744 417 349 385 692 734 1,895 % of sales 12.3 13.9 27.3 15.7 13.5 15.3 13.1 14.4 18.1

Items affecting comparability in operating profitUPM Biorefining – – – – – – – – –UPM Energy –1 – –9 – – – –1 – –9UPM Raflatac – –5 – – – – –5 – –UPM Specialty Papers – – – – – – – – –UPM Communication Papers –29 – –1 – 17 30 –29 47 46UPM Plywood – – – – – – – – –Other operations –2 – 345 – – – –2 – 345Eliminations and reconciliations 2) 6 4 6 –3 –2 – 10 –3 1Items affecting comparability in operating profit, total

–26 –1 340 –3 15 30 –27 44 382

Comparable EBITUPM Biorefining 161 212 241 256 155 195 373 350 847UPM Energy 49 39 32 29 20 42 88 63 123UPM Raflatac 30 31 27 33 37 29 60 65 126UPM Specialty Papers 26 8 4 15 33 37 35 70 90UPM Communication Papers 65 85 72 69 72 54 150 126 267UPM Plywood 13 13 9 7 16 19 26 35 52Other operations –6 –9 21 25 0 –12 –15 –11 35Eliminations and reconciliations 8 –4 –2 –15 – –9 4 –9 –26Comparable EBIT, total 345 374 404 420 334 355 719 689 1,513 % of sales 13.2 13.9 14.8 15.9 12.9 14.1 13.6 13.5 14.4

1) The 2018 comparative figures have been restated due to accounting policy change of forest renewal costs. Refer to » Basis of preparation and accounting policies.2) Eliminations and reconciliations includes changes in fair value of unrealised cash flow and commodity hedges.



External sales by major products

BUSINESS AREA BUSINESS Q2/2019 Q2/2018 Q1–Q2/2019 Q1–Q2/2018 Q1–Q4/2018

EUR millionUPM Biorefining UPM Pulp

UPM Biofuels UPM Timber

554 536 1,135 1,053 2,223

UPM Energy UPM Energy 45 20 89 66 109UPM Raflatac UPM Raflatac 385 371 783 717 1,488UPM Specialty Papers UPM Specialty Papers 309 313 605 605 1,213UPM Communication Papers UPM Communication Papers 1,128 1,143 2,318 2,261 4,664UPM Plywood UPM Plywood 113 119 230 239 458Other operations Wood Sourcing and Forestry

UPM Biochemicals UPM Biocomposites

70 82 136 156 321

Eliminations and reconciliations 1 4 2 5 7Total 2,605 2,589 5,298 5,102 10,483

BUSINESS PRODUCT RANGE

UPM Pulp Softwood, birch and eucalyptus pulpUPM Biofuels Wood-based renewable diesel for transport and renewable naphtha for transport and for bioplasticsUPM Timber Standard and special sawn timberUPM Energy Electricity and related servicesUPM Raflatac Self-adhesive paper and film label stockUPM Specialty Papers Labelling materials, release base papers, flexible packaging materials, office papers, graphic papersUPM Communication Papers Graphic papers for various end usesUPM Plywood Plywood and veneer products, thermoformable wood materialWood Sourcing and Forestry Wood and wood-based biomass (logs, pulpwood, chips, forest residues etc.), full forestry service offeringUPM Biochemicals Lignin products for industrial use, nanocellulose-based products for biomedical applicationsUPM Biocomposites UPM ProFi decking products and UPM Formi granules



Changes in property, plant and equipment

Financial assets and liabilities measured at fair value

Fair value measurements using significant unobservable inputs, Level 3

EURm Q1–Q2/2019 Q1–Q2/2018 Q1–Q4/2018

Book value at beginning of period 4,186 4,281 4,281Reclassification to leased assets (IFRS 16) –91 – –Capital expenditure 121 113 286Decreases –3 –8 –15Depreciation –197 –205 –408Impairment charges –1 – –Translation difference and other changes 19 32 41Book value at end of period 4,033 4,213 4,186

EURm 30 JUN 2019 30 JUN 2018 31 DEC 2018

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 TotalFinancial assetsDerivatives non-qualifying hedges

– 28 – 28 – 12 – 12 – 16 – 16

Derivatives under hedge accounting

46 174 – 220 104 139 – 243 106 140 – 246

Energy shareholdings – – 2,139 2,139 – – 2,011 2,011 – – 2,159 2,159Total 46 201 2,139 2,387 104 151 2,011 2,266 106 156 2,159 2,421

Financial liabilitiesDerivatives non-qualifying hedges

– 8 – 8 – 15 – 15 – 10 – 10

Derivatives under hedge accounting

4 21 – 25 43 40 – 83 15 56 – 71

Total 4 28 – 33 43 55 – 98 15 66 – 81

Specific valuation techniques used to value financial instruments at level 2 include the following methods:

Interest forward rate agreements (FRA) are fair valued based on quoted market rates on the balance sheet date. Forward foreign exchange contracts are fair valued based on the contract forward rates at the balance sheet date. Foreign currency options are fair valued

Fair valuation of energy shareholdings in the UPM Energy (Pohjolan Voima Oyj’s A, B, B2, C, C2, M and V-shares, Kemijoki Oy shares, and Länsi-Suomen Voima Oy shares) is based on discounted cash flows model. The electricity price estimate is based on fundamental simulation of the Finnish area electricity price. A change of 5% in the electricity price used in the model would change the total value of the assets by approximately EUR 350 million. The discount rate of 5.49% used in the valuation model is determined using the weighted

based on quoted market rates and market volatility rates on the balance sheet date by using the Black&Scholes option valuation model. Interest and currency swap instruments are fair valued as present value of the estimated future cash flows based on observable yield curves. Commodity swaps are fair valued based on forward curve quotations received from service providers.

average cost of capital method. A change of 0.5% in the discount rate would change the total value of the assets by approximately EUR 280 million. Other uncertainties and risk factors in the value of the assets relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project. UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. Changes in regulatory environment or taxation could also have an impact on the value of the energy generating assets.

There have been no transfers between Levels.

ENERGY SHAREHOLDINGS

EURm Q1–Q2/2019 Q1–Q2/2018 Q1–Q4/2018

Opening balance 2,159 1,974 1,974Disposals –1 – –1Fair value changes recognised in other comprehensive income –19 37 185Closing balance 2,139 2,011 2,159



Fair value of financial assets and liabilities measured at carrying amount

Commitments and contingencies

Notional amounts of derivative financial instruments

Capital commitments

EURm 30 JUN 2019 30 JUN 2018 31 DEC 2018

Non-current debt, excl. derivative financial instruments and lease liabilities 676 665 659

The fair values of all other financial assets and liabilities approximate their carrying amount.

EURm 30 JUN 2019 30 JUN 2018 31 DEC 2018

Own commitmentsMortgages 1 12 1

On behalf of othersGuarantees 2 2 2

Other own commitmentsLeasing commitments for the next 12 months 1) 5 80 90Leasing commitments for subsequent periods 1) – 382 464Other commitments 73 93 92Total 81 569 649

EURm 30 JUN 2019 30 JUN 2018 31 DEC 2018

Interest rate forward contracts 1,623 2,033 1,129Interest rate swaps 330 750 753

Forward foreign exchange contracts 2,684 2,403 2,524Currency options, bought 3 18 21Currency options, written 6 25 31

Cross currency swaps 171 163 167Commodity contracts 921 705 1,189

EURm COMPLETION TOTAL COSTBY 31 DEC

2018 Q1–Q2/2019AFTER 30 JUN

2019

Renovation and modernisation / Kuusankoski hydro power plant Q4 2022 22 – 1 21Paper machine conversion / Nordland paper mill Q4 2019 116 35 20 61Capacity increase / Changshu paper mill Q4 2019 34 9 5 20Capacity increase / Chudovo plywood mill Q3 2019 50 42 5 3

1) Leasing commitments have decreased as a result of the adoption of IFRS 16 Leases 1 January 2019. Refer to » Basis of preparation and accounting policies.



Basis of preparation and accounting policies

This unaudited interim report has been prepared in accordance with the accounting policies set out in International Accounting Standard 34 on Interim Financial Reporting and group’s consolidated statements for 2018.

Alternative performance measures presented in this report should not be considered as a substitute for measures of performance in accordance with the IFRS and may not be comparable to similarly titled amounts used by other companies.

Figures presented in this report have been rounded and therefore the sum of individual figures might deviate from the presented total figure. Key figures have been calculated using exact figures.

On 1 January 2019, UPM has adopted IFRS 16 Leases standard and changed accounting policy of forest renewal costs. Description of effects of implementation and changes in accounting policies are presented below.

IFRS 16 LeasesThe group as a lesseeOn 1 January 2019, UPM has changed its accounting policy regarding recognition, measurement, presentation and disclosure of leases. As a result, UPM as a lessee has recognised most of leases on the balance sheet and there is no distinction between operating and finance leases anymore.

Leases of property, plant and equipment where UPM, as a lessee, obtains substantially all of the economic benefits from the use of the identified asset and where UPM has the right to direct the use of the identified asset, are classified as leases.

The group recognises a leased asset and a lease liability at the lease commencement date, except for short-term leases. Short-term leases are leases where the duration of the lease term is 12 months or less. In case the contract includes a purchase option, it is not a short-term lease. UPM recognises lease payments of short-term leases as an expense on straight-line basis over the lease term.

The lease term of the different contracts is determined as the non-cancellable period taking into consideration the options to extend and terminate if it is reasonably certain that the group will exercise the extension option or will not exercise the termination option. If the contract is for an indefinite period of time and the group and the lessor both have a right to terminate the contract within a short notice period (12 months or less) without a significant penalty, the contract is considered to be a short-term and the lease payments are expensed in the income statement on a straight-line basis over the lease term.

Leased asset comprises the initial lease liability, initial direct costs and the obligations to refurbish the asset, less any incentives granted by the lessors. The leased asset is subsequently valued at cost less accumulated depreciation and impairment losses. Remeasurement takes place in case lease liability is remeasured and change in cash flows is based on contract terms that have been included in the original contract. The leased asset is depreciated over the shorter of the asset’s useful life and the lease term.

The lease liability is recognised at the commencement date and measured at the present value of the lease payments to be paid during the lease term. The group uses, as a basis, discount rate implicit in the lease and if that rate cannot be readily determined, UPM uses incremental borrowing rate which comprises of currency and lease period based reference rate and specific credit spread. Lease payments can include fixed payments, variable payments that depend on an index or rate and extension option payments or purchase options if it is reasonably certain that the group will exercise them. The lease liability is subsequently measured at amortised cost using the effective interest rate method and remeasured (with corresponding adjustment to the related leased asset) when there is a change in future

lease payments due to renegotiation, changes of an index or rate or reassessment of options.

The group has elected to separate non-lease components such as service components and other variable components and account them for as expenses, if they can be separated from the leased asset. However, the group does not separate non-lease components from the lease contracts of company cars.

The group does not apply portfolio approach of leases with similar characteristics.

The group as a lessorAt inception of a lease contract, the group makes an assessment whether the lease is a finance lease or an operating lease. If the lease transfers substantially all of the risks and rewards incidental to ownership of the asset, it is considered to be a finance lease; if not, the lease is considered to be an operating lease. The group has only a minor amount of operating lease contracts, whereby the lease payments are recognised on a straight-line basis over the term of the lease.

Implementation of IFRS 16 The group has adopted the IFRS 16 standard using modified retrospective application method without restatement of comparatives. Under IFRS 16, a right-of-use asset (i.e. leased assets), representing right to use the underlying asset, and a lease liability, representing the obligation to make lease payments, is recognised on the balance sheet.

As part of the transition, leased assets of EUR 489 million and lease liabilities of EUR 488 million were recognised at the date of initial application on 1 January 2019. The most significant lease contracts recognised on the balance sheet consists of land areas, power plants and real estate. UPM estimated the remaining lease term as of 1 January 2019 and measured its lease liability at the present value of the remaining lease payments discounted using incremental borrowing rate at the date of application 1 January 2019. Lease payments relating to an optional renewal period in the lease liability were included only if it was reasonably certain that the group will exercise that option. The group applied IAS 36 Impairment of Assets to assess the leased assets for impairment at the date of initial application and consequently recognised an adjustment, net of tax, to the opening balance of retained earnings.

UPM applied short-term leases exemption consistently upon transition and subsequently for all asset classes.

For transition purposes UPM did not reassess previous decisions about existing contracts whether they are or contain a lease. Additionally, the group did not identify initial direct costs of leases previously classified as operating leases. At the date of initial application, the group did not apply practical exemption to account leases with the remaining term less than 12 months as short-term leases.

The Group has elected to separate lease and non-lease components for all asset classes except for company cars.

Upon transition, UPM did not make any adjustments to existing finance lease balances which have been accounted for in accordance with IAS 17. Subsequently, the group accounts for the leased asset and lease liability in accordance with the general requirements of IFRS 16.

The impact of the initial application of IFRS 16 by each balance sheet line item is described below. The balance sheet impact includes also the reclassification of finance leases recognised in accordance with IAS 17 at 31 December 2018 to leased assets and lease liability. In addition, certain long-term land use contracts were reclassified from intangible rights to leased assets. The corresponding lease liabilities have been settled in previous periods. Operating lease prepayments reported in trade and other receivables at 31.12.2018 were reclassified to leased assets.



EURm 31 DEC 2018 IMPACT OF IFRS 16 1 JAN 2019

ASSETSGoodwill 236 – 236Other intangible assets 295 –16 279Property, plant and equipment 4,186 –92 4,094Leased assets – 598 598Forest assets 1,945 – 1,945Energy shareholdings 2,159 – 2,159Other non-current financial assets 178 – 178Deferred tax assets 397 – 397Net retirement benefit assets 38 – 38Investments in associates and joint ventures 32 – 32Other non-current assets 34 – 34Non-current assets 9,501 489 9,991

Inventories 1,642 – 1,642Trade and other receivables 1,833 –8 1,825Other current financial assets 107 – 107Income tax receivables 24 – 24Cash and cash equivalents 888 – 888Current assets 4,496 –8 4,488Assets 13,996 482 14,479

EQUITY AND LIABILITIESShare capital 890 – 890Treasury shares –2 – –2Translation reserve 232 – 232Other reserves 1,778 – 1,778Reserve for invested non-restricted equity 1,273 – 1,273Retained earnings 5,623 –6 5,617Equity attributable to owners of the parent company 9,792 –6 9,786Non-controlling interests 5 – 5Equity 9,797 –6 9,791

Deferred tax liabilities 535 – 535Net retirement benefit liabilities 679 – 679Provisions 126 – 126Non-current debt 753 420 1,173Other non-current financial liabilities 101 – 101Non-current liabilities 2,194 420 2,614

Current debt 25 68 93Trade and other payables 1,881 – 1,881Other current financial liabilities 78 – 78Income tax payables 22 – 22Current liabilities 2,005 68 2,073Liabilities 4,199 488 4,687Equity and liabilities 13,996 482 14,479

Adjustments of opening balances

EURm

Operating lease commitments 31.12.2018 554Recognition exemption for short-term leases –7Reasonably certain extension or termination options 53Non-lease components (service components) –27Other –1Gross lease liabilities at 1.1.2019 572Discounting 1) –84Lease liability 1.1.2019 488Present value of finance lease liabilities 31.12.2018 98Total lease liabilities 1.1.2019 586

The following reconciliation to opening balance for the lease liabilities as of 1 January 2019 is based upon the operating lease commitments as of 31 December 2018:

1) The lease liabilities were discounted at incremental borrowing date as of 1.1.2019. The weighted-average incremental borrowing rate was 1.4%.



Accounting policy change of forest renewal costs

On 1 January 2019, UPM has changed its accounting policy relating to forest assets by capitalising forestry renewal costs on the balance sheet during the growth cycle and reclassifying forest assets-related cash flows from operating cash flow to investing cash flow. Previously UPM has recognised forestry renewal costs in income statement and reported forest assets-related cash flows, including forest renewal costs, forest asset purchases and sales, in operating cash flow. UPM has consistently increased the weight of the Southern hemisphere plantations in its forest asset portfolio, where the growth cycle is significantly shorter and significance of forestry renewal cost

AS PUBLISHED Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q4/18

Comparable EBITDA, EURm 461 487 425 449 1,823% of sales 16.9 18.4 16.4 17.9 17.4Operating cash flow, EURm 420 434 329 208 1,391Operating cash flow per share, EUR 0.79 0.81 0.62 0.39 2.61Investing cash flow, EURm –83 –61 –62 –54 –260Net debt to EBITDA (last 12 m.) –0.17 0.00 0.23 0.02 –0.17

RESTATED Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q4/18

Comparable EBITDA, EURm 473 497 442 456 1,868% of sales 17.3 18.7 17.1 18.2 17.8Operating cash flow, EURm 384 405 328 214 1,330Operating cash flow per share, EUR 0.72 0.76 0.61 0.40 2.49Investing cash flow, EURm –46 –33 –61 –59 –199Net debt to EBITDA (last 12 m.) –0.17 0.00 0.22 0.02 –0.17

RESTATED Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q4/18

EUR millionUPM Biorefining 282 297 199 233 1,011UPM Energy 34 31 23 44 132UPM Raflatac 35 41 44 36 156UPM Specialty Papers 23 34 53 56 167UPM Communication Papers 99 97 101 84 381UPM Plywood 15 13 22 24 75Other operations –14 –2 1 –13 –28Eliminations and reconciliations –2 –15 – –9 –26Total 473 497 442 456 1,868

AS PUBLISHED Q4/18 Q3/18 Q2/18 Q1/18 Q1–Q4/18

EUR millionUPM Biorefining 271 288 185 227 970UPM Energy 34 31 23 44 132UPM Raflatac 35 41 44 36 156UPM Specialty Papers 23 34 53 56 167UPM Communication Papers 99 97 101 84 381UPM Plywood 15 13 22 24 75Other operations –14 –2 –2 –13 –31Eliminations and reconciliations –2 –15 – –9 –26Total 461 487 425 449 1,823

Comparable EBITDA by business area

UPM group

substantially higher compared to the Northern hemisphere. Majority of UPM’s forest renewal costs are related to Southern hemisphere plantations. Thus, the change of accounting policy results in more relevant information on group’s financial performance and cash flows.

The change has an impact on the following key figures in UPM group, UPM Biorefining and Other operations: EBITDA, EBITDA margin, operating and investing cash flows, operating cash flow per share and net debt to EBITDA ratio. Operating profit, comparable EBIT and balance sheet are not affected. The comparative years have been restated according to the new reporting principles.

UPM-Kymmene CorporationAlvar Aallon katu 1 PO Box 380 FI-00101 Helsinki, Finland tel. +358 2041 5111 fax +358 2041 [email protected] [email protected]

It should be noted that certain statements herein, which are not historical facts, including, without limitation, those regarding expectations for market growth and developments; expectations for growth and profitability; and statements preceded by “believes”, “expects”, “anticipates”, “foresees”, or similar expressions, are forward-looking statements. Since these statements are based on current plans, estimates and projections, they involve risks and uncertainties which may cause actual results to materially differ from those expressed in such forward-looking statements. Such factors include, but are not limited to: (1) operating factors such as continued success of manufacturing activities and the achievement of efficiencies therein including the availability and cost of production inputs, continued success of product development, acceptance of new products or services by the Group’s targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by the Group’s patents and other intellectual property rights, the availability of capital on acceptable terms; (2) industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for the Group’s products and the pricing pressures thereto, financial condition of the customers and the competitors of the Group, the potential introduction of competing products and technologies by competitors; and (3) general economic con ditions, such as rates of economic growth in the Group’s principal geographic markets or fluctuations in exchange and interest rates. The main earnings sensitivities and the group’s cost structure are presented on pages 135–136 of the 2018 Annual Report. Risks and opportunities are discussed on pages 30–31 and risks and risk management are presented on pages 106–109 of the report.

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HALF YEAR FINANCIAL REPORT 2019 - UPM · China and the US, growth in China, the undefined nature of Brexit and political uncertainties in several countries. These issues may have